Everyone who invests in the stock market hopes to make huge returns within the shortest time possible. The problem is that many people buy into stocks blindly without regard to their profit potential. Using stock trading chart patterns, you will be able to see the big picture and predict price movements in the future. With the right prediction, you will certainly make a lot of profit.
Just how do you use stock trading patterns when making trading predictions? What you need is to know how to spot the bases that define these trading patterns so as to get on the best stocks early – time over time. Here are three ways to go about it:
1. Look for Cups With or Without Handle
This is the most common stock trading pattern. It is also the most profitable. When you view it from the side, the pattern is shaped the same as a teacup. To be able to use this pattern in your trading, there are certain things you should look for including a previous uptrend of 30 percent or more. This tells you that after rising for a while, the stock takes a slight deep as it prepares itself for a more substantial climb.
Apart from that, the base depth should be between 15 and 30 percent. This represents the extent to which the stock price dropped from the peak on the left to the bottom of the cup. The idea is to spot stocks with the ability to resist sliding too far as the market corrects itself. In addition to that, look for a base length that lasts for 7 weeks or more. A stock whose base takes longer than 7 weeks is able to consolidate better. Anything shorter than that indicates higher chances of failure.
Characteristically, the stock trading pattern should have a light handle with a depth of between 10 and 12 percent. A check that the handle doesn’t begin forming too soon. Half-way from the base is always the best. To use this pattern, you should be ready to hold the stock for the long-term.
As such, people who bought at the end of the previous uptrend would want to sell as soon as the price hits the previous high. As soon as all the weak holders have sold-out their stocks, the prices begin moving higher. Thus the ideal buy point is 10 percent from the base of the handle. Avoid buying extended stocks, which are at least 5 percent over the ideal buy point. Volume on day of breakout is between 40 and 50 percent.
2. Double Bottom Patterns
Second to the cups in terms of commonality is the double bottom pattern. It happens in a choppy, volatile stock market. Like the cups, this sets the stage for bigger than average price gains. It indicates one down leg followed by an attempt to rally, only to hit resistance and pull another down leg. When the stock rebounds a second time, it moves higher by breaking through the resistance. Thus, the ideal buy point is at least 10 percent from the last point of resistance.
Things to look for include a prior uptrend of more than 30 percent, a base depth of up to 40 percent, and a base length of 7 weeks or more. Ideally the peak at the center of W at least halfway above the base. The ideal buy point is 10 percent over from the middle of the W with a buying range of not more than 5 percent.
3. Flat Base Patterns
This kind of pattern occurs soon after a double bottom or cup with handle. It provides an opportunity for investors to add shares or start a new position in addition to a current one. The decline in this stock trading pattern is milder than that of a cup with handle as well as the double bottom. With this pattern, there is a fairly consistent price range indicating how much money institutional investors are willing to spend. Support and resistance are established by adding 10 percent to the most current position of resistance. Thus, the stock has to break through the ceiling to be able to launch another leg of a climb. The shakeout happens when weaker investors get tired of the indecisiveness of the market.
Things to look out for include a prior trend of at least 30 percent, a 15 percent base depth, and a base length of 5 weeks or more. The ideal buy point is 10 percent above the highest peak of the base with a buying range of at least 5 percent. It is advisable to buy the stock within that range. The volume on day of breakout should ideally lie between 40 and 50 percent.
As you can see, a clear analysis of these three stock trading patterns can help you make huge profits. The trick lies in knowing exactly when to buy a stock. In all of the three examples, what’s important is knowing the ideal buy point. Once you have identified it, go ahead and buy!